In this insightful whiteboard guide, uncover the number of properties required for financial freedom in Australia. Learn effective real estate strategies that can help you build wealth and enjoy an early retirement.
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We're always in search of the perfect strategy, and unfortunately, there's not a one-size-fits-all approach.
However, I'm going to do my best to show you the simplest way to use real estate to:
Now, financial freedom is so important.
When you go out there onto YouTube or Google and search "How do I actually invest in real estate to retire?" you're going to see so many conflicting views.
So, I thought, why not make it more confusing for you and share my thoughts? (Haha! No, that would be mean. Just kidding!) What I'm actually going to do is try and simplify it so you can use the tools or strategy in this article, adapt your mindset to what you want to achieve, and execute.
I've got my whiteboard here, so let's jump into it.
The perfect strategy for me personally starts with the foundation.
If you decide to build a house and focus on the roof colour first, you'll fail.
Unfortunately, we don’t spend enough time on the structure, the slab, or what’s underneath the ground to ensure a good foundation. The roof colour comes later in the process. This will all make sense as we go through this.
If we’re looking at building a foundation, we want something rock solid.
In times of economic turmoil, properties will continue growing, continue providing cash flow, and when times are good, these properties will still be in demand and continue growing as well. So, I believe, to do this well, we'd be looking at a minimum of five to seven years.
You might hear that and feel discouraged because you want to retire in three or four years. Well, then real estate is probably not for you. You’re taking shortcuts in an industry that can take a long time.
I’ve talked to people who have been investing for 20 or 30 years, and some have taken the wrong turns or bought the wrong investments, yet they’re still at it and haven’t reached financial freedom.
There are ways to get to financial freedom earlier, within 10 to 12 years, and I want to show you how. But it comes down to having the information and executing.
One thing to keep in mind: by not doing anything, you lose every day. It's like staying in the same position while the rest of the world keeps moving. Then you wake up one day and wonder how things changed so quickly.
A real-life example is people who, for the last five or ten years, said: I could buy, but I won’t because it’s a bad time to buy.
You do this every year, hoping your savings will grow, but with inflation over the last two to three years, you’ve probably lost 15 to 20% worth of compounded money in terms of your savings.
If you had invested, you'd be so far ahead with those leverage gains.
This is why I make these articles, because if you're not making moves, you're moving backward.
So, let's continue. If I was to build a foundation, what would I use?
Right now, if you can buy a $400,000 property, I’d look at a house, and I’d do this every year for the next five years. Keep it simple.
Your first question might be: “$400,000? Am I buying a unit? In the middle of nowhere?”
The answer is: No. The market is big here in Australia, and there are pockets where you can buy brick homes for under $450,000.
That’s what we do at the buyers' agency—though I’m not plugging anything (but I just did).
Going back, if I bought five $400,000 properties, my asset value—my portfolio—would be worth $2 million.
At an average growth rate of 7%, assuming break-even cash flow (I know it’s harder today with higher interest rates, but we’re talking long-term averages), after five years, that $2 million portfolio will have made $800,000.
That means your portfolio is now worth $2.8 million. After 10 years, you're looking at $3.9 million, nearly 2x your original $2 million investment.
Now, real estate doesn’t require you to have $2 million upfront.
You might need 10% for deposits, plus 5% for costs, so realistically, you’re in for about $300,000 to $400,000, and in 10 years, you’ve made $1.9 million.
At this point, you’ve got a crossroads: do you buy your principal place of residence and pay off your debt, or do you keep investing?
You could buy your residence, or if you’re like me, young and wanting to keep buying investment properties, you might choose to let your money grow in real estate rather than savings. If you ever want to buy a residence, you could sell a couple of properties and still be ahead.
Let’s explore the principal place of residence option.
After five years, your portfolio is worth $2.8 million, with $800,000 in equity. You have $1.7 million in debt.
If you wanted to buy a $1.5 million home, you'd need $225,000 (for 10% deposit plus 5% costs), meaning you’d need a borrowing capacity of about $3 million. That sounds like a lot because it is.
If the debt-to-income ratio (DTI) is 6, you’d need about $500,000 in income for a $3 million loan. Again, speak to a broker for specifics, but let’s say that’s the case. With a 5% rental yield of $2.8 million, you’d have $140,000 in rental income, meaning you’d need a household income of $360,000.
I know I gloss over numbers—$2 million here, $3 million there—but I understand this isn’t normal for everyone. Not everyone is in a position to own five properties and then buy a residence, and many people don’t want a $1.5 million home; a $500,000 house could be enough, changing the numbers accordingly.
However, I want you to take away the formula and thought process, and apply it to your own life.
After five years, with a $1.5 million residence and a $2.8 million investment portfolio, you’d have $4.3 million in real estate.
With a 7% growth rate, you’d make $301,000 per year compounded.
Some years may see more than 10% growth, and some may drop by 2%, but averaging at 7%, you’re looking at $30,000k a year.
In five years from now, your properties are probably in positive cash flow. That's not because you've paid down some of that debt; it's more so because your rents will continue to increase if you're in the right market. You might have each property giving you about $7,000 in positive cash flow, which means you're making about $35,000 a year from your investment properties.
In this situation, you pretty much have $35,000 coming from your investment portfolio, and that could then go towards your home repayments.
You also have $300,000 worth of equity growing in your portfolio.
This is such a powerful position to be in because you now have a machine that continues growing, and that equity is growing tax-free.
This is why it's so important to start as early as possible. Even if it's just one property now, you can compound that in two or three years. I urge you to start — dip your toes in, and you will start seeing the benefits five to ten years from now.
I can tell you now, from my own experience: ten years ago, I bought my first property. I sat there thinking, "This is cool; it didn’t change my life, but I hope the process works."
I trusted the process, and now, ten years later, knowing everything I know and seeing how that portfolio has developed and grown, I would do it all over again — probably try to do it twice as fast, but that’s a different story.
The next question is: What's the alternative?
If I continued rentvesting and paying down my debt, what would I need to do?
Well, I could pay extra towards the $1.7 million worth of debt. It would be paid off in ten years. My investment portfolio would be worth $3.9 million, and I would be debt-free in about 15 years.
What I mean by this is that you could go down the path of saying: I don't want to buy my principal place of residence; I’ll keep the level of debt I have.
In ten years' time, my property values would have gone up, my rents would have gone up, and I’d have used all the extra cash flow — the extra money I make from my active income, be it a job or business — and plugged that into paying down my debt.
I could be debt-free in 15 years and have a portfolio worth about $4 million. I could then rent pretty much anywhere, and that would be paid for with my positive cash flow property portfolio.
Another option down this path is that you could sell two of the properties. You would then reduce your debt and use the equity to go ahead and buy your principal place of residence.
In this case, if you think you don’t have enough income, you could say: Let me get rid of some of the debt I have.
You’d use the cash to actually buy your principal place of residence with a high deposit and lower amount of debt.
Therefore, after ten years, the principal place of residence I purchased for $1.5 million, and the investment portfolio is worth $3.9 million, minus $1.6 million in debt. This means the total net value of my portfolio is about $2.3 million because my debt is around $900,000.
I could then use $600,000 to $700,000 worth of cash and put that into the principal place of residence. By selling the properties and taking the cash, I could use that as a deposit for my principal place of residence, reducing the debt to $1.5 million minus $600,000, which means $900,000 worth of debt on the principal place of residence.
Therefore, the value would be $1.5 million for the principal place of residence plus the $2.3 million from the remaining properties in the investment portfolio, giving a total of $3.8 million against $1.8 million of debt, which means an LVR (loan-to-value ratio) of 47%.
This is why, when you look at the average loan or the average loan-to-value ratio here in Australia, it’s actually quite low — closer to about 30%.
Despite you going out and buying a property at, say, 80% or 90%, over time, as the value of that property increases, despite you paying no debt down, your LVR will continue to drop.
To summarise, with my fantastic drawing: Your principal place of residence would be worth $1.5 million. Your investment portfolio (three properties left because you sold two) would be worth $2.3 million.
As time goes on, you have compounding growth.
It’s very important to realise that capital growth is important, but so is rental growth. A combination of these two allows you to maintain your lifestyle and hold this machine for a longer period of time. In addition to that, your active income needs to continue growing.
If you're in a job you really like, fantastic! But if you say: I also want to take out more debt, you're going to have to get uncomfortable.
Buying one or two properties is actually quite simple; it's easy to execute. But when you start thinking about how to build a portfolio, and how to actually get there, you need the right tools. You also need to put in the hard work because what you’re trying to achieve — less than one percent of the entire population will ever experience.
You're going to have to grind a little harder: take up some jobs, do the side hustles, keep getting promoted, move around to different jobs — whatever the case is.
You need to know that your active income is so important because it allows you to access debt. Debt is what we need to build this portfolio a lot faster.
Finally, this only works if you buy in the right markets with the right properties. It all goes out the window if any of those five properties is a dud.
That’s why your foundation is so important. Get the right properties in there, get the right team around you, and if you need help executing and buying in the right places, definitely book a FREE discovery call with my Search Property team. You can check out client testimonials as well about their experiences.
I hope you guys enjoyed this one. I’ll catch you in the next one.
Thanks, guys!
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